China Warns Huawei Report Could Harm U.S.-China Relations

The Chinese government hinted at a potential setback in relations between Beijing and Washington over mounting U.S. suspicion of Huawei Technologies and ZTE. The WSJ's Paul Mozur has the details.

By

Siobhan Gorman And

Paul Mozur

Updated Oct. 9, 2012 10:11 p.m. ET

The Chinese government hinted Tuesday at a potential setback in relations between Beijing and Washington over mounting U.S. suspicion of Chinese telecommunications companies.

China's commerce ministry warned that relations between the two countries would be hurt by a congressional report that said two Chinese telecommunications firms pose national security threats to the U.S.

The sharply-worded statement came a day after China's foreign ministry and China's state-run news agency also objected to a House intelligence committee report that urged U.S. companies to spurn the two Chinese firms, Huawei Technologies Inc. and
ZTE
Inc.

The report, released Monday, concluded that the telecommunications equipment sold by both companies could be used as a vehicle for Chinese spying in the U.S. Both companies have rejected the allegations, and Huawei called the findings politically-motivated.

China's forceful response shows how the highly-critical bipartisan report, released in the midst of a political season, runs the risk of aggravating tensions between the two powers. Both countries are facing leadership transitions that tend to strike stronger nationalist stances.

Relations may be strained further by a coming U.S. intelligence report on intellectual property theft, which focuses heavily on China, according to people briefed on it.

China's commerce ministry spokesman, Shen Danyang, said Tuesday that the U.S. report "violated its long-held free-market principles and would undermine cooperation and development between the two countries." The statement didn't specify how the move could undermine cooperation.

"We hope the U.S. can make concrete efforts to create a just and fair market environment for the two countries and promote sound development of bilateral economic and trade ties," Mr. Shen said.

The report, he said, "is merely based on subjective conjecture and untrue foundations, and made groundless accusations against China."

Rep. C.A. Ruppersberger, the top Democrat on the House intelligence committee, said in response to Beijing's complaints that Chinese companies may be suffering because of cyber spying by their own government. "This, combined with recommendations in the report—such as being more transparent and following U.S. and international law—would help them expand their markets."

At the White House, spokeswoman Caitlin Hayden said the administration is reviewing the congressional report and "has been working closely with the telecommunications industry to identify national security risks."

Tuesday's statement escalated Beijing's rhetoric over the congressional report. On Monday, a spokesman for China's Foreign Ministry said, "We hope that the U.S. Congress can reject bias, respect the facts and do more to promote China-U.S. economic relations, rather than the opposite."

State Department spokeswoman Victoria Nuland declined to respond directly to the Chinese government warnings. She referred to public comments Tuesday, in which she said, "I'd assume that we've heard from them in diplomatic channels, in Beijing as well."

The U.S. Defense and Commerce Departments are assessing the extent to which foreign companies are embedded in U.S. telecommunications networks. The White House last year launched a review, prompted in part by concerns over Huawei, of security issues presented by U.S. telecom networks being run on foreign equipment.

The Chinese government has protectionist practices in place that limit foreign investment in a range of categories, including telecommunications and technology. It also adopted a law last year that established an aggressive review process for any foreign company that prompts a security concern.

But the Chinese government seizes on opportunities "to point out our own less-than-rigorous adherence to our broad principles and to try to highlight those for moral edge," said
Kenneth Lieberthal,
who was a White House national security adviser specializing in China during the Clinton administration.

China's statements come in a year of strained trade relations between the two countries. Last month, Mr. Obama blocked a firm owned by two Chinese nationals from acquiring a wind farm near a test site for military drones, citing national security concerns.

Still, China is a major trading partner of the U.S. and either side could be leery of making moves that could further hurt weakened economic growth, said
A. Greer Meisels,
a China specialist at the Center for the National Interest.

"I would be surprised if this report sparked a trade war—though I wouldn't put it past the Chinese government to make things more 'difficult' for U.S. companies operating in China for the time being," she said.

The countries have been at loggerheads on other trade issues. The World Trade Organization accepted a complaint from the U.S., the European Union and Japan over the summer against China's hold on global production for rare-earth minerals. In June, a WTO panel ruled that China's tight grip on credit- and debit-card transactions discriminated against U.S. card companies, though the organization stopped short of backing U.S. claims that a state-controlled company operated a monopoly in China.

China's trade practices have spilled over into the U.S., becoming a presidential campaign issue between Mr. Obama and Republican Mitt Romney. In an Internet ad unveiled this week, the Obama campaign sought to tie Mr. Romney to Huawei through his former buyout firm, Bain Capital. Bain and Huawei had worked to acquire a U.S. company in 2008, but the deal was scuttled over national security concerns.

Obama campaign spokesman Ben LaBolt said Mr. Romney, as a Bain investor, stood to profit from the Huawei deal and Mr. Romney didn't speak out against it when asked by Republicans to do so.

The Romney campaign called the ad "false and ludicrous" because Mr. Romney was no longer running Bain at the time of the attempted deal.

With leadership changes looming for both governments, Mr. Lieberthal said the risk is that officials in one country will make statements in the heat of a nationalistic period that can't be undone. "The real concern is that no party does anything this year that they can't walk back next year," he said.

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